It's not true that the "house" always wins — but it's close. Various estimates put casino "winners" — gamblers who walk away from a casino with more money than they entered it with — at somewhere between 10% and 15%. According to the American Gaming Association, commercial casinos made $60 billion in 2022 and the relatively young sports betting industry earned almost $11 billion in 2023.
If you're one of the many (49% of Americans) who participated in some form of gambling in the past year, you may nevertheless beat the odds and hit the jackpot at some point. But before you spend that mad money, take a breather. Gambling winnings are subject to tax. There are also other considerations if you prevail at the racetrack, score in a fantasy football tournament or win a game of poker.
In general, winnings from casinos, lotteries, raffles, sports betting, horse races, sweepstakes and other contests and games of chance are taxable. Winnings include cash as well as goods appraised at their fair market value. And it doesn't matter if they come from a glitzy casino or a local charity's fundraiser. If you're a casual (as opposed to a professional) gambler, winnings from all gambling activities are subject to federal tax.
The amount you've won will be reported on IRS Form 1040, under "Other income," and your winnings typically will be taxed at your ordinary income tax rate. The casino, nonprofit or other game sponsor may withhold taxes from your winnings and provide you with IRS Form W-2G, "Certain Gambling Winnings," which will be used to complete your tax return. If you itemize deductions, you're allowed to claim gambling losses. However, the deduction is limited to the amount of your winnings.
State tax may also apply to gambling winnings. In general, you're responsible for paying tax to the state where you won money or a prize, not to your state of residence (if they're different).
If you gamble occasionally for entertainment, a big win probably comes as a pleasant surprise. Depending on the amount, you may be tempted to spend it right away in five-star restaurants or on luxury goods. But before buying anything, think about other ways you could use the money. If you have debt (besides a mortgage or other lower-interest-rate debt), paying it down should be your first priority when you have extra funds.
Besides paying off debt, think about contributing winnings to:
These options may not sound as "fun," as spending your jackpot immediately, but they'll provide longer-term benefits. This doesn't mean you shouldn't enjoy your win. You can always go out for a nice meal or make some other small expenditure to commemorate your gambling victory.
Obviously, a once-a-year trip to Las Vegas or Atlantic City where you lose a small amount but enjoy yourself doing it, probably isn't problematic. However, many Americans have gambling issues — and until they deal with them, they aren't likely to be financially secure.
The National Council on Problem Gambling (NCPG) estimates that 2.5 million Americans have a severe gambling addiction and another five to eight million have mild to moderate gambling problems. Signs of a serious issue include thinking about gambling all the time, feeling out of control and gambling despite frequent losses and mounting debt. In extreme circumstances, gambling problems can lead to loss of a job or family, bankruptcy, and other legal and financial problems. Notably, 75% of problem gamblers play slot machines, according to Quitgamble.com.
If these signs sound familiar and you suspect you or a loved one has a gambling disorder, seek help from NCPG (ncpgambling.org), Gamblers Anonymous (gamblersanonymous.org) or a state government agency.
Although few casual gamblers make the leap, there are certain tax advantages to "going pro." If you meet the IRS's requirements and qualify as a professional gambler, you can deduct gambling losses, as well as wagering-related business expenses. Non-wagering expenses should be "ordinary and necessary" for your gambling business and could include transportation, meals and entertainment, tournament admissions, and gambling-related media subscriptions.
To qualify as a professional gambler, you'll need to demonstrate a profit motive. The IRS also considers factors such as:
To help make your case, keep excellent records of expenses and winnings, submit quarterly estimated tax payments to the IRS and work with a professional tax advisor to prepare your return.
Get in touch today and find out how we can help you meet your objectives.
